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Are Dividend Stocks Truly Good for Young Investors? (Investing Secrets)

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Is dividend investing for young investors?

Dividend stocks are not the ‘next darling of the WallStreet‘. The price of these stocks won’t go up 100% in a day and drop 90% the day after.

Most young investors find dividend investing boring.

Are Dividends Stocks Good for Young Investors?

Investing in dividend-paying stocks that are stable and grow with time is a better option than investing in stocks that have a lot of volatility. When you are young with little money to invest, you want to grow your capital while protecting your wealth.

You may not sound cool investing in boring dividend stocks such as ‘MacDonald’s’.

While it might be great if you have invested in the next Tesla, Amazon, or Google.

But it will be pretty bad, if you have invested in similarly famous companies such as Yahoo, AOL, Pebble, Path, and StumbleUpon.

As a “Young Investor” myself.

I will rather have more money, than looking cool and be broke.

Because…

Investing is not to impress others. Investing is to prepare for your financial future.

Why Good Dividend Stocks Are Also Growth Stocks?

A good dividend stock will often use its retained earnings to reinvest in the company and its products, which will help it grow over time. This growth can lead to capital gains for the shareholders, in addition to the regular dividends they receive.

The growth of the stock is often due to the management’s ability to increase the income, and strong MOAT due to the nature of the business.

(We have an in-depth article on teaching you how to find a good dividend stock, you can check it out after this article.)

We called Good Dividend Stocks, as ‘Dividend Growth Stock’.

Good dividend stocks have the characteristics of both a dividend stock and a growth stock.

  • These stocks give dividends periodically
  • They increase in value and grow over time.

Being young is an huge advantage in investing.

When you are in your 20s, you have a huge advantage over those in their 30s, and those in their 30’s having a huge advantage over those in their 40s, and so on.

Smart young investors like you should consider investing in good dividend stocks.

Here is why…

Read Also: 7 Deadly Sins of Beginner Investors

Why Smart Young Investors Should Invest in Dividend Stocks

Young investors looking to make their money work for them should consider investing in dividend stocks. Dividend-paying stocks offer a number of benefits for those just starting out, including; regular income, lower investment risk, and potential for capital appreciation.

1. Compounding

Compounding is the process of earning interest on the principal, and then reinvesting that interest to earn more interest. The process occurs over time, thus the longer the money is invested, the greater the potential for compounding to work in the investor’s favor.

Compounding is especially beneficial for young investors because their money has more time to grow. When you are young, time is your friend, and compounding is what makes you rich.

“Compounding is the eight wonder of the world. He who understand it, earn it, he who doesn’t, pays it.”

– Albert Einstein, Year 1987-1955

Many dividend investors are made rich because of 2 reasons,

  1. Knowing how to find a good dividend stock
  2. Understand the magic of compounding interest and let time work its magic.

“My wealth has come from a combination of living in America, some lucky genes, and compound interest.”

– Warren Buffett

Well, you probably don’t need to be living in America to be wealthy. Nowadays, the internet connects everything, but you will definitely need the power compounding to be wealthy.

When you are young, you have much more time to compound the money you invest than those who are older than you.

Hum… still not convinced?

Here is an example to help you understand the power of compounding.

Power of Compounding (Example)

There are 3 friends Bob, Mary, and John who read this article and decided to invest in some good dividend stocks.

Goal: Retire at age of 60

(Check out our article on, ”how much you will need to retire as well!)

They invest in the same stock giving them the same returns and dividend yield each year.

The dividend stock they invested in has the following metrics:

  • Grow at 5% per year
  • Have a 5% yield on the dividend

Each invests $100,000 into the dividend stock.

The only difference is each start investing at a different age but retires at the age of 60.

  • Gen Z Investor, Bob invested $100,000 in the stock at the age of 20.
  • Millennial Investor, Mary invested $100,000 in the stock at the age of 30.
  • Gen X Investor, John invested $100,000 in the stock at the age of 40.

At the age of 60, each has the following amount for their retirement

  • Bob invested at age of 20
    • Invested $100,000 for 40 years growing at 5% per year
    • Stock Value
      • Initial = $100,000
      • 40 Years later = $704,000
    • 5% Dividend Yield Per Annual
      • Initial = $5,000
      • 40 Years later = $35,200
  • Mary invested at age of 30
    • Invested $100,000 for 30 years growing at 5% per year
    • Stock Value
      • Initial = $100,000
      • 30 Years later = $432,194
    • 5% Dividend Yield Per Annual
      • Initial = $5,000
      • 30 Years later = $21,610
  • John invested at age of 40
    • Invested $100,000 for 20 years growing at 5% per year
    • Stock Value
      • Initial = $100,000
      • 20 Years later = $265,330
    • 5% Dividend Yield Per Annual
      • Initial = $5,000
      • 20 Years later = $13,266

John will only have 265k for his retirement if he has invested at age of 40, which is not too bad. But the dividend ($13,266 per annual) he receives from his investment will probably be not enough for his retirement.

Mary invested 10 years earlier than John and has almost doubled John’s investment with 432k for retirement. As icing on the cake, she will have a pretty modest amount of dividend for her retirement ($21,610 per annual).

Bob will probably have the best life of all. Investing young at the age of 20, Bob will have over 704k to spend for his retirement. His investment generates quite a sum of dividends for him to live off each year ($35,200 per annual).

If Bob keeps letting his investment grow and spends only on the dividend, he will probably not worry about money for the rest of his life.

Investing $100,000 in the same stock with just 10 years difference will have a huge difference in your retirement life.

Such is the power of compounding.

Dividend Investing - Are dividend stocks good for young investors - Compounding return for retirement
Dividend Investing – Compounding return for retirement

Read Also: How to make $50,000 passive income for retirement?

2. Lower Investment Risk

Dividend stocks tend to have lower investment risk than non-dividend stocks because they are less volatile and provide a regular income stream. And for young investors, investing in dividend stocks can mean lower overall portfolio risk and more stability over time.

Even if you are young, not losing money matters.

When investing, risk is very real, and losing money can hurt your investment return.

When you lose 50% of your investment today, you’ll need to gain 100% tomorrow if you want to avoid losing money.

  • $1.00 that loss 50% = $0.50
  • $0.50 that gains 50% = $0.75
  • $1.00 – $0.75 = You loss $0.25

There are many investing gurus that ask young investors to take on more risk so that they may earn more.

So-called gurus often preach, “more risk gives more return”.

I disagree.

More risk does not mean more return.

The amount of risk you take in your investment and the rate of return you receive does not correlate when you are investing.

Investing is only risky because you don’t really understand the stock you are trying to buy.

“Investing without understanding is not investing. It is gambling.”

– Kopi buddy

Smart dividend investors like you don’t gamble, you invest in what you know.

Why does Dividend Stock have a lower investment risk?

Generally, dividend stocks have a more stable cash flow, whereas good dividend stocks often distributed dividends to shareholders using free cash flow that is below the critical dividend payout ratio.

Most good dividend stocks are often also established companies.

Established companies have these few characteristics:

  • A long history of business shows some sort of moat.
  • A good amount of data for research before you buy.
  • Comparatively easy to understand business.

Established companies are less risky when compared with small company which is less likely to have good financials.

Buying stocks offered by established companies (good dividend stocks) helps you to lower the risk during your investment journey.

“The individual investor should act consistently as an investor and not as a speculator.”

– Father of Value Investing, Ben Graham, Year 1894 – 1976

You are an investor and not someone who can predict the future.

Make investment decisions based on facts and analysis rather than risky speculations.

Dividend Investing - Are dividend stocks good for young investors - Lower risk, higher return
Dividend Investing – Lower risk, higher return

Read Also: What are the risk and benefits of investing in Real Estate Index Trusts (REITs)?

3. Passive Dividend Income

Dividend stocks offer a passive income stream that can be a great way for young investors to diversify their portfolios. With dividend stocks, they are relatively stable, meaning they tend not to experience wide swings in price.

Dividend stocks are a good choice for investors of all age who wants a stable form of passive income without the emotional stress of investing.

This can be important for investing success as having dividend income helps you to become less emotional when investing.

“If you cannot control your emotions, you cannot control your money.”

– Warren Buffett

Emotion kills investment returns.

Everyone knows that if we want to earn money in stocks, we buy low and sell high.

But in reality, most young investors, and even some pros, buy high and sell low.

Why?

Investors that are unable to control their emotions make 2 very bad mistakes,

  • They are fearful when the stock drop, thus selling low.
  • They are greedy when the stock raises, thus buying high.

How does having dividend income help in controlling your emotions?

Dividend income controls your emotions in 2 ways:

  1. Dividend income reduces your fear of losing money, thus you will be less prone to sell low.
    • Even when the stock price drop, your dividend helps you to reduce the impact of the loss.
  2. Dividend income allows you to have a better cash flow.
    • Better cash flow prevents you from being forced into a situation where you need to sell your stock at bad timing.

As a Bonus, dividend income can boost your return!

Dividend income can increase your investment return in 2 ways:

  1. Reinvest automatically by joining Dividend Reinvesting Plan (DRIP). It automatically reinvests your dividend income into the same stock passively.
  2. Reinvest manually with the extra cash you get from the dividend in the same stock, or other stocks when the price is low. (You’ll need to know how to value a company to get the best return.)
Dividend Investing - Are dividend stocks good for young investors - Dividend income, remove emotions
Dividend Investing – Dividend income, removes emotions

Read Also: 7 deadly sins of investing as a new investor

Biggest Myths About Investing

Many investing gurus advise younger investors to invest in growth stocks over dividend stocks.

Myth: Although growth stocks are usually very risky. When you are young, you can afford to take more risk and thus, this is justified.

This is bad advice and this is why.

Although, when you are young you can afford to take on more risk, as you have more years for you to recover from that downfall.

But that idea of getting more risk and losing money broke the rule of investing taught by Warren Buffett, the most successful investor in the world.

Warren Buffett 2 Rules for Investing:

  • Rule No. 1: Never lose money.
  • Rule No. 2: Never forget rule No. 1.

If you put yourself more at risk than necessary, you will probably break Rule 1 and 2 of Warren Buffett.

Instead, here is a suggestion.

Invest in good dividend stocks that grow.

This form of investing is basically the best of both worlds.

Good dividend stocks are something that is both safe and have high rate of return.

Should Young Investors Like You Buy Dividend Stocks?

Investing in good dividend stocks can be one of the best strategies for young investors. You will be able to earn passive income in the form of dividends and grow that dividend over time as the company grows.

The key, is to know how to find a good dividend stocks.

In my other article, I have listed the top characteristics of good dividend stocks. With an in-depth understanding of stock’s fundamentals, Warren Buffett has made over $3.8 Billion dollars in dividends a year by owning these great dividend stocks.

Smart young investors should consider investing in dividend stocks because of 3 main reasons:

  1. Compounding your returns to prepare for retirement
  2. Lower risk which gives you a better chance of getting a better return
  3. Dividend income helps to remove your emotion from investing

Start Investing At a Young Age

Warren Buffett started to invest young at the age of 11. That is the first ingredient that made him a Billionaire.

You are probably older than 11 years old right now, but it is never too late.

Probably you will not be the richest investor, but getting to live comfortably through investing is totally possible.

The second ingredient for building wealth through investing is even more important.

Gain Knowledge Before Putting in Your First Dollar

Knowledge is what differentiates a successful investor from a dreamer.

Successful investors like Warren Buffet are successful because they have the right knowledge to make the right decision to buy or sell a stock.

Combined with the right investing knowledge and the advantages of starting young. You have the time as your friend and the power of compounding as your secret weapon.

Successful investors like Warren Buffett read approx. 500 pages a day.

Knowledge of investment can be learned from books or articles like this one. Reading can only make you wiser and smarter so that you too may be able to make the right decision in your investment.

“Education is a progressive discovery of our own ignorance.”

– Will Durant

Hey Buddies!

Have our dividend investing posts inspired you?

Personally, I only started my investing education a decade or so, and I am still learning a lot along the way.

Dividend investing is by far my favorite and I strongly encourage you to start your investing journey while you are young!

Anyways, if you like this post, check out my other post on dividend investing below.

Till next time!

Kopi Buddy Signing Out!

PS. We are working on creating a forum for our growing community, join our other buddies in a conversation there!

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Founder & Financial Writer at Income Buddies | Website | Posts by Author

Antony C. is a dividend investor with over 15+ years of investing experience. He’s also the book author of “Start Small, Dream Big“, certified PMP® holder and founder of IncomeBuddies.com (IB). At IB, he share his personal journey and expertise on growing passive income through dividend investing and building online business. Antony has been featured in global news outlet including Yahoo Finance, Nasdaq and Non Fiction Author Association (NFAA).

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